Google and the limits of antitrust: the case against the case against Google.

Author:Manne, Geoffrey A.
Position::Twenty-Ninth Annual Federalist Society National Student Symposium: Originalism
 
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ABSTRACT

The antitrust landscape changed dramatically in the last decade. Within the last two years alone, the Department of Justice has held hearings on the appropriate scope of Section 2 of the Sherman Act and has issued, then repudiated, a comprehensive Report. During the same time, the European Commission has become an aggressive leader in single-firm conduct enforcement by bringing abuse of dominance actions and assessing heavy fines against firms including Qualcomm, Intel, and Microsoft. In the United States, two of the most significant characteristics of the new antitrust approach have been the increased focus on innovative companies in high-tech industries and the diminished concern that erroneous antitrust interventions will hinder economic growth. This focus on high-tech industries is dangerous, and the concerns regarding erroneous interventions should not be dismissed too lightly. This Article offers a comprehensive, cautionary tale in the context of a detailed factual, legal, and economic analysis of the next Microsoft: (1) the theoretical, but perhaps imminent, enforcement against Google. Close scrutiny of the complex economics of Google's disputed technology and business practices reveals a range of procompetitive explanations. Economic complexity and ambiguity, coupled with an insufficiently deferential approach to innovative technology and pricing practices in the most relevant case law, portend a potentially erroneous--and costly--result. Our analysis, by contrast, embraces the cautious and evidence-based approach to uncertainty, complexity, and dynamic innovation contained within the well-established error-cost framework. As we demonstrate, though there is an abundance of error-cost concern in the Supreme Court precedent, there is a real risk that the current, aggressive approach to antitrust error, coupled with the uncertain economics of Google's innovative conduct, will yield a costly intervention. The point is not that we know that Google's conduct is procompetitive, but rather that the very uncertainty surrounding it counsels caution, not aggression.

  1. INTRODUCTION II. INNOVATION, ERROR COSTS AND THE LIMITS OF ANTITRUST III. THE UNCERTAIN ECONOMICS OF GOOGLE'S BUSINESS AND GOOGLE'S MARKET A. Some Basics of Online Search B. Google's Market C. The Importance of Quality Scores D. Network Effects IV. THE MONOPOLIZATION CASE AGAINST GOOGLE A. First Principles of Monopolization Enforcement B. Monopoly Power C. Market Definition and Monopoly Power D. The Question of Network Effects E. Has Google Engaged in Exclusionary Conduct? F. Exclusive Syndication Agreements and Other Foreclosure-Based Arguments G. Substantial Foreclosure H. Quality Scores V. CONCLUSION I. INTRODUCTION

    Much has changed in the monopolization law landscape since the watershed Microsoft decision over a decade ago. In the past. two years, the Department of Justice has issued, and then repudiated, a comprehensive report on Section 2 of the Sherman Act, and the European Commission has risen as a leader in single firm conduct enforcement by bringing claims against firms including Qualcomm, Intel, and Microsoft. Meanwhile, China has passed its own antitrust law and has become an important participant in debates over the future of international antitrust. Most recently, the Federal Trade Commission (FTC) controversially invoked its authority under Section 5 of the Federal Trade Commission Act (FTC Act) to challenge Intel's pricing practices in the microprocessor market. (2)

    Applying antitrust laws to innovative companies in dynamic markets has always been a perilous proposition, and despite significant advances in economics and jurisprudence, it remains so. Successful firms such as Google, which compete in markets characterized by innovation, rapid technological change, and a strong reliance on intellectual property rights, are especially likely, and especially problematic, targets?

    Contemporary monopolization enforcement in the US is focused substantially on innovative companies in high-tech industries, creating substantial concerns that antitrust error in the form of successful interventions against pro-competitive innovations and business practices will hinder economic growth. Given the fundamental difficulty of identifying the competitive consequences of business practices generally, and innovations especially, concern with the social costs of these errors ("error costs") has been a mainstream consideration in antitrust policy discourse for the last quarter century. Unfortunately, current antitrust enforcers in the US have minimized these error cost concerns, with one even declaring that "there is no such thing as a false positive." (4) At the same time, enforcers at the FTC have brought a complicated and controversial case against Intel under Section 5 of the FTC Act, precisely in order to make an end-run around Sherman Act jurisprudence that enshrines error cost concerns. (5) Less than a year after the Supreme Court reinforced that error costs were a central component of monopolization doctrine, antitrust enforcers in the United States have adopted a dramatically different--and opposing--view of the role that antitrust errors should play in future enforcement decisions. (6)

    Things have also changed in the web-based economy. As is to be expected in dynamic markets, it would have been difficult to predict in 1998 the challenge that Linux would pose to Microsoft, the growth of Google, the commercial success of the iPod, the transformative role of mobile and cellular computing, and many other welfare-enhancing innovations over the last decade. But despite these apparent changes in the legal and economic environment, the antitrust community finds itself facing the same debate that raged before the Microsoft wars: What is the appropriate role of antitrust, and monopolization law in particular, in the New Economy? Much has been written on this topic, with virtually every conceivable policy position having been taken in some form or another. Some have argued that the economy moves too fast for antitrust remedies to be fully effective. (7) Others have argued that antitrust rules simply should not apply where innovation and dynamic competition are at stake because of the potential chilling effects on innovation. (8) Still others have argued that anticompetitive abuses are even more likely to stifle innovation and harm consumers in the modern economy, and thus antitrust enforcers should be especially active in these markets. (9)

    This Article will discuss the problems of antitrust enforcement in the Internet economy, and the theoretical case against the antitrust community's contemporary bete noir, Google. It will embrace the cautious and evidence-based approach to uncertainty, complexity, and dynamic innovation contained within the errorcost framework, a mainstream and well-developed method of evaluating legal rules generally, and, in this case, for balancing the full social benefits and costs of proposed antitrust interventions. This approach is well accepted in the antitrust literature among lawyers and economists. (10) But many antitrust enforcers and a vocal subset of commentators have shunned the approach, because they view the error-cost framework as an annoying impediment to more vigorous enforcement. (11) For example, at least one Federal Trade Commissioner has lamented the evolution of antitrust rules that, in his view, systematically under-deter anticompetitive behavior because of the incorporation of the error-cost framework and concomitant concerns about false positives into Sherman Act jurisprudence. (12)

    These recent developments, which are impelled by the implicit belief that antitrust intervention is nearly always beneficial from a long-term consumer-welfare perspective, portend a movement away from competition policy informed by error-cost analysis. This approach stands in stark contrast to the error-cost framework, which presumes that errors are an inevitable and core feature of the antitrust enterprise. The new approach implies that concerns about over-deterrence should not affect either enforcement decisions or the design of liability rules. Indeed, advocates of this approach suggest that error-cost concerns are antiquated in the New Economy, and that false positives are no longer a concept capable of contributing to the antitrust policy debates. This is a problematic stance that is contrary to modern economics and the logic of legal rules, and it portends a costly mistake in the perhaps inevitable antitrust case against Google.

    Part II will argue that, contrary to these recent critics and agency authorities, error-cost analysis is not only helpful, but essential to identifying and designing optimal antitrust rules in the New Economy. (13) The application of the error-cost framework in antitrust originates with Judge Frank Easterbrook's seminal analysis, The Limits of Antitrust, which was built on twin premises: first, that false positives are more costly than false negatives because self-correction mechanisms mitigate the latter but not the former, and second, that errors of both types are inevitable because distinguishing procompetitive conduct from anticompetitive conduct is an inherently difficult task in the single-firm context. (14) At its core, the error-cost framework is a simple but powerful analytical tool that requires inputs from state-of-the-art economic theory and empirical evidence regarding the competitive consequences of various types of business conduct, and that produces outputs in the form of legal rules. Although legal scholars typically avoid rigorous attempts to work through the available economic theory and evidence when discussing the optimal design of legal rules, economists frequently fail to assess their analyses in a realistic institutional setting and avoid incorporating the social costs of erroneous enforcement decisions into their analyses and recommendations for legal...

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